39. Refer to Global Advertising Company. What is Global's cost of retained earnings? a. 12.22% b. 17.22% c. 10.33% d. 9.66% e. 16.00% 40. Refer to Global Advertising Company. What is the cost of common equity raised by selling new stock? a. 12.22% b. 17.22% c. 10.33% d. 9.66% e. 16.00%
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Global Advertising Company
The Global Advertising Company had net income after interest but before taxes of $40,000 this year.
The marginal tax rate is 40 percent, and the dividend payout ratio is 30 percent. The company can raise
debt at a 12 percent interest rate for any amount of debt less than $8,000. If the firm raises $8,000 or
more of debt, a 15 percent interest rate will apply to that new debt. The last dividend paid by Global was
$0.90. Global's common stock is selling for $8.59 per share, and its expected growth rate in earnings and
dividends is 5 percent. If Global issues new common stock, the flotation cost incurred will be 10 percent.
Global plans to finance all capital expenditures with 30 percent debt and 70 percent equity.
39. Refer to Global Advertising Company. What is Global's cost of
a. 12.22%
b. 17.22%
c. 10.33%
d. 9.66%
e. 16.00%
40. Refer to Global Advertising Company. What is the
stock?
a. 12.22%
b. 17.22%
c. 10.33%
d. 9.66%
e. 16.00%
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